Employee or Subcontractor

So here I am again, writing a little something to help educate you the business owner, or you the employee. I have noticed that with the economy being on an either flat line or downward spiral, many businesses have had to cut back. These cut backs consists of their employees due the high costs of payroll, workman's compensation, medicare & social Security. Normally the average employer will pay approximately 18-20% in addition to the employee's agreed upon pay rate.

For example:
ABC, Corp hired an office administrator by the name of Sarah at an annual salary of $36,000 a year. Sarah would gross (bring home before taxes) $1,384.62 every two weeks. This $1,384.62 would cost the employer on average a total $1,661.54 which is an additional $276.92 bi-weekly, $553.84 every month or $6,646.04 every year for just this one employee. ABC, Corp is now technically paying Sarah a salary of $42,646.04.

As you can tell by the example this is a very costly employee. Therefore, many employers, small business or even large corporations are turning to so called "subcontractors" or the "independent contractors". In many aspects these types of individuals are very beneficial because there are no pensions, insurances, training, and extra money spent on payroll. However, many companies believe that anyone can be considered a "subcontractor" or the "independent contractor", this is not true.

Most administrative staff is not considered a subcontractor or independent contractor because the employer normally sets the hours, the rules and the training as well as materials. However, commissioned sales representatives could possibly be based as a subcontractor or independent contractor because they normally supply their own materials (such as postcards, flyers, business cards, etc. ), they also do not need training on the job requested of them.

A good rule of thumb is to determine whether or not a person is considered subcontractor or employee is the following:

They can be divided into three categories:

• Behavioral control evaluates whether you have the right to direct and control how the work is done (training and instructions)
• Financial control considers whether you have the right to direct and control the economic aspects of the work (significant investment, expenses, opportunity for profit or loss)
• Relationship of the parties looks at how you and the worker view your relationship (employee benefits and written contracts).

All facts and circumstances of your situation must be examined to determine whether a worker is an employee or subcontractor. No single factor provides the answer.


Also, it is best practice for a business owner to have every subcontractor complete a W9 form (link provided below) as well as keep detailed record keeping of what monies are paid out to the subcontractor. If the subcontractor is paid by the small business more than $600 per year the employer is legally required to provide a 1099 so that the subcontractor can claim the untaxed income on their personal tax return. If the subcontractor is Incorporated or LLC the business owner does not have to provide them with a 1099 as they file corporate taxes whether pass through or not.

If you have the right accounting or bookkeeping personnel these rules should be known as this could cause serious penalty to the business owners.

For more information about subcontractors from the IRS:
http://www.irs.gov/pub/irs-regs/subcontractorsfaq&a.prn.pdf

If you want the IRS to determine work status (subcontractor status)complete form SS-8:
http://www.irs.gov/pub/irs-pdf/fss8.pdf

If you want to complete or have your subcontractors complete a W-9:
http://www.irs.gov/pub/irs-pdf/fw9.pdf